Is MBIA's Executive Compensation Fair?

Aug.29.08 | About: MBIA Inc. (MBI)

In the MBI forum, CT Programmer recently commented favorably on CEO Brown's performance: "I could kiss Jay Brown. He's doing an incredible job taking a company that everyone said was gone, and building it back up bit by bit." I too think Jay Brown is doing a good job, and thought it would be apropos to talk about what his rewards will be if and when the rebuilding job is complete.

Part of Brown's compensation is in the form of a grant of 1,634,000 shares of restricted stock, received 5/01/2008 when the stock stood at $11.74. The grant is subject to the following terms: "The restricted stock will vest fully if, on or before 2/18/2013, the average share price of MBIA's (NYSE:MBI) common stock over any twenty consecutive trading days is at least $40 per share." Lesser prices get lower vesting: $16.20 gets 0%, $20.96 gets 20%, 25.72 gets 40%, 30.48 gets 60%, and 35.24 gets 80%. Amounts in between are pro-rated.

On the first quarter conference call, Brown encouraged owners to regard the "analytical adjusted book value," 42.15 at the time, as the fair value of their shares. So, as you can see, all he has to do is get the shares to trade at their fair value and he will have a very nice payday, 65 million.

All he has to do is get the shares to trade at their fair value. It is not really all that easy: he has Ackman, Moody's, S&P, Fitch, Dinallo, Mr. Market, the credit crisis, demoralized staff, apathetic analysts, hostile news media, disgruntled shareholders, etc., to contend with. Meanwhile we have the end of the credit rating and bond insurance system as we know it. It was not that long ago that double donuts seemed like a possible outcome.

Often we read articles bemoaning the excessive compensation management receives: they send all the jobs to China and then pay themselves millions while honest working folk starve and freeze, or eke out a meager livelihood as wage-slaves for WalMart. They mismanage a company into bankruptcy and then depart with golden parachute payments while loyal employees lose their pensions. So on and so forth, and some of it true.

But as far as I'm concerned, Mr. Brown works for me, and if he can get my stock up to $40 by 2/18/13, I will be only too happy to see him get his reward. It's pay for performance, pure and simple, and if he gets partial results, he will be rewarded pro rata., fair and square. I like the pay plan: it aligns his interests with mine; I too would like to see MBIA shares trade above $40. If he can make that happen he has earned 65 million. After all, it is not an easy task he has ahead of him, and he has made a very promising start.

Implication for Investors: look for MBIA to trade over $40 per share by 2/18/13.

Disclosure: Long.